CIA Annual Meeting Assemblée annuelle de l’ICA

1. CIA Annual MeetingAssemblée annuelle de l’ICA June 29 & 30, 2006 Ÿ Les 29 et 30 juin 2006 Ottawa, Ontario IND-3: Hot Concepts, How the Business is Sold

2. Audience: Canadian Institute of Actuaries Topic: Overview of Personal & Corporate Estate Bond with Explanation of Leveraged Life Insurance Aspects Presenter: Cam MacIntyre, Regional Marketing Manager, Manulife Financial Personal & Corporate Estate Bond

3. Personal Estate Bond Personal Leveraged Life Insurance Corporate Estate Bond Corporate Leveraged Life Insurance Hot Concepts in the Life Insurance Marketplace

4. The Estate Bond‘Using Mattress Money More Efficiently”

5. Or...How to maximize the amount your family will get from your passive investments.

6. 1) Fear for money while both are alive (financial independence, conservative investing) 2) Once gone, concern for the spouse’s continued security (simplify investments, life-long solutions) 3) Once both gone, an orderly transfer of assets to the children and grandchildren (estate planning, insurance, will planning) What are Main Concerns for People in the Last Quarter of their lives?

7. Do you know anyone, say 65 to 75: healthy, doing well financially, certainly with enough income to live on, a fairly conservative investor with a long investment horizon is concerned about next generations? Who?

8. Then you may know the person who is acting as the ‘guardian’ for money for the next generation…. And you may know a person who would love this idea, because it is…. tax efficient an estate multiplier a guaranteed inheritance even if your client needs to access more money from the pot they’ve put away! So…..

9. Personal money Profitable Investment Holdcos and/or Professional Corporations or Significant cash/near cash investments generating interest income Interested in tax-deferral/tax shelter ideas Longer term focus Family orientation Typically 50+ Client ID

10. There are two kinds of assets Invested Assets Your use and benefit Your family’s future security

11. Assets earmarked for your family’s future security are often in low-risk, fairly to highly liquid investments Today they might earn 3% - 5% pre-tax, 2% - 2.5% after tax If we can move these investments to a tax-deferred environment, we might be able to double the yield, compliments of Revenue Canada! Kinds of Assets to Consider?

12. These investments might normally be 10-20% of an “older” client’s investable assets How much to consider?

13. Clients are m65ns & f62ns. They have $35,000 in GICs/Bonds for family security Their accountant has reminded them (again) that they are paying the highest tax rate on the money Their goal is to maximize the amount that will eventually pass to their family once they are gone. The $35,000 is presently invested in term certificates at 5.5%, and is subject to annual accrual taxation. Personal Tax Rate is 35% Case Study

14. Present Situation $ 35,000 GICs 5.5% $1,925 interest The Government Family $674 $1,251

15. Assuming death of the second spouse when the youngest reaches age 88 (27 yrs), what will the family get? 1.Original capital $ 35,000 2.Growth on capital $ 65,335 3.Net to family $ 90,335

16. Is there a better solution?

17. Investments Tax Deferred Tax Exposed !

18. $ 7,910 $ 27,090 Tax Exempt Joint Life Insurance Contract Side Account 4 years Estate Bond $35,000 The Government Tax from Side Account $ 688

19. Assuming death of the second spouse when the youngest reaches age 88 (year 27), what will the family get? 1. Original capital $ 35,000 2.Total death benefit $147,350 3. Net to family $147,350 Assuming 4.0% interest

20. $ 147,350 50 55 88 91 Estate Bond Let’s Compare... $ 90,355 50 55 88 91 Term Certificate

21. Comparison Personal Estate Bond ** GIC * Total taxes payable $29,808 $688 Net to Family $90,355 $147,350 i.e. +$56,995 * assuming 5.5%, 35% tax ** assuming 4.0% interest

22. Profitable Investment Holdcos and Professional Corporations or personal money Significant cash/near cash investments generating interest income Interested in tax-deferral/tax shelter ideas Longer term focus Family orientation Typically 50+ Client ID

23. What happens if you want to access funds? Then, what do you do……..?

24. Leveraged Life Insurance I. Accumulation Phase Deposits $ Exempt Life Insurance • Client purchases a cash value life insurance policy • Client deposits additional amounts to maximize growth • Deposits accumulate and grow over time

25. Leveraged Life Insurance II. Access Phase 2. Loan $ Exempt Life Insurance 1. Collateral assignment • Client uses the policy as collateral security for a bank loan • Borrowing should avoid income taxation on these cash flows • Client uses the loan for personal or business purposes

26. Leveraged Life Insurance III. Settlement Phase 1. Death benefit pays bank loan 2. Remainder of death benefit gets paid to policy beneficiary ESTATE • Bank loan is repaid through death benefit • Remaining death benefit goes to beneficiary of the policy

27. Corporate Estate Bond

28. Or ... How to maximize the amount your family will get from your company

29. Profitable operating companies (Opco) substantial retained earnings, or Investment (Holdco) & professional corps cash/near cash investments generating interest income Interested in tax-deferral/tax shelter ideas Maximize amount family will get from company Longer term, estate planning focus Client Profile

30. Family business owners M55 & F50, non-smokers 2 categories of assets in their company: ONE... their use and benefit during their lifetime. TWO...“earmarked” for benefit of family. They “earmarked” about $100,000 for family. Case Study

31. Goal to maximize amount that will pass to family once they are gone. $100,000 presently invested in term certificates at 6%, and is subject to annual accrual taxation. Corporate tax rate is 49.3% (includes RDTOH) Personal dividend tax rate is 31.60% Case Study

32. Present Situation $100,000 Opco. (retained profits) Holdco. (investment income) $6,000 interest @ 6% The Government Family $2,926 (including RDTOH) $3,074

33. Assuming death of second spouse when youngest reaches age 86 (37 yrs), what will family get? 1. Original capital $ 100,000 2. Growth on capital $ 206,540 3. Refundable div. tax $ 107,523 4. Total taxable dividend $ 414,063 5. Tax on dividend paid ( 129,602) 6. Net to family $ 284,461

34. Is there a better solution?

35. There are two kinds of assets Opco. (retained profits) Holdco. (investment income) Your use and benefit Your family’s future security

36. Investments Climates Tax Deferred Tax Exposed

37. $ 19,055 $ 80,945 $500,000 Tax-exempt life insurance contract Side Account 5 years Corporate Estate Bond $ 100,000 TheGovernment $ 2,369 tax on Side Account

38. Tax Free Opco / Holdco Capital Dividend Account Regular Retained Earnings Tax-free Capital Dividend Taxable Dividend Family How family gets the money... Insurance Proceeds

39. Assuming death of second spouse when youngest reaches age 86 (37 yrs), what will family get? 1. Original capital $ 100,000 2. Insurance Proceeds $ 1,097,406 3. Refundable div. tax $ 0 4. Capital dividend $ 1,097,406 5. Tax on dividend paid $ 0 6. Net to family $ 1,097,406

40. $ 1,097,406 Let’s Compare... $ 284,461 50 55 86 91 50 55 86 91 Term Certificate Estate Bond

41. Corporate Estate Bond GIC Total tax payable $ 202,489 $ 7,134 Net to Family $ 1,090,272 $ 284,461 $ 805,811 Increase Comparison...

42. Tax-deferred investment fund Tax-free estate proceeds (including investment fund) Cost-effective way to pay estate taxes & conserve assets Creditor protection Improve estate planning clarity, liquidity & certainty Flexibility and control (ownership & beneficiary provisions) Why Would You Do this?

43. What happens if you want to access funds? Then, what do you do……..?

44. Access to funds… (Leveraged Life Insurance) $ 1,097,406 - 271,940 Dividend $ 20,000 - 448,019 Interest $ 649,387 Term Certificate Estate Bond 50 55 86 91 67 72 50 55 67 72 $ 271,940 taxable dividends ($ 186,820 after tax) 86 91 $ 271,940 taxable dividends ($ 186,820 after tax)

45. Thank You!